Decentralization of Ethereum's Builder Market

Abstract: Blockchains protect an ecosystem worth more than $500bn with strong security properties derived from the principle of decentralization. Is today's blockchain decentralized? In this paper, we empirically studied one of the least decentralized parts of Ethereum, its builder market. The builder market was introduced to fairly distribute Maximal Extractable Value (MEV) among validators and avoid validator centralization. As of the time of writing, two builders produced more than 85% of blocks in Ethereum, creating a concerning centralization factor. However, a common belief is that such centralization "is okay," arguing that builder centralization will not lead to validator centralization. In this empirical study, we quantify the significant proposer losses within the centralized builder market and challenge the belief that this is acceptable. The significant proposer losses, if left uncontrolled, could undermine the goal of PBS. Moreover, MEV mitigation solutions slated for adoption are affected too because they rely on the builder market as an "MEV oracle," which is made inaccurate by centralization. Our investigation reveals the incentive issue within the current MEV supply chain and its implications for builder centralization and proposer losses. Finally, we analyze why the proposed mitigation cannot work and highlight two properties essential for effective solutions.

• The paper reveals that private order flows contribute over 60% of MEV in daily block constructions, underscoring their pivotal role.
• The paper finds that steep entry barriers, including up to 1.4 ETH investments, limit new builder competitiveness in MEV-Boost auctions.
• The paper quantifies auction inefficiencies with a 0.98% total proposer gain loss, highlighting significant risks to market decentralization.

Decentralization of Ethereum's Builder Market

The paper, "Decentralization of Ethereum's Builder Market," presents a thorough empirical investigation into the builder market of Ethereum, particularly emphasizing the challenges and implications of centralization. This study contributes significantly to the ongoing discussion around the decentralization of blockchain systems, particularly Ethereum, which underpins a value ecosystem exceeding $500 billion.

Core Problem: Builder Market Centralization

Ethereum's use of a builder market aims to mitigate centralization risks stemming from Maximal Extractable Value (MEV). However, evidence suggests that after two years of using this mechanism, a concentration problem has emerged: a mere three builders control over 90% of block production within the network. This study aims to decipher the reasons for this centralization and its implications for market competitiveness and security related to MEV-Boost auctions.

Methodology and Dataset

The researchers conducted a rigorous empirical study based on a large-scale auction dataset they amassed since 2022. The dataset includes a remarkable 5.57 billion partial bids and additional full bid data from the ultra sound relay, spanning several months. This dataset allowed them to trace the real-time dynamics of MEV-Boost auctions and scrutinize the inner workings of Ethereum's builder market.

Key Findings

1. Role of Private Order Flows: The study identifies private order flows—transactions bypassing the mempool—as critical to the success in MEV-Boost auctions. Private order flows contribute to more than 60% of the MEV in over 50% of daily block constructions, thus forming a significant entry barrier for new builders who lack access.
2. Barriers to Entry and Cost of Participation: To access private order flows, a new builder may need to invest up to 1.4 ETH to surmount entry barriers such as transaction fees and subsidy costs necessary to participate and remain competitive in MEV-Boost auctions.
3. Inequality in Competitive Capability: Using metrics like the Quartile Coefficient of Dispersion (QCD), the study highlights substantial inequality in MEV extraction capabilities among builders, with top builders showing relatively balanced capabilities. However, this inequality intensifies as MEV increases.
4. Competitiveness and Efficiency in Auctions: The analysis reveals that 88.84% of the auctions are competitive, yet only 79.74% are efficient. A total inefficiency loss of 221.09 ETH (0.98% of the total gains for proposers) was observed. Inefficiencies arise, in part, from situations like block subsidization, where winners overbid to secure auction wins, highlighting the need for balanced participation opportunities.

Implications and Future Work

The study suggests that the observed centralization threatens Ethereum's decentralization ethos and highlights trust crises within the ecosystem's MEV supply chain. In addressing this, the authors propose avenues for future work, including stronger mechanisms for detecting order flow leakage, enhancing community-supervised platforms like MEV-Share, and developing fair exchange systems.

By providing actionable insights into Ethereum's builder market, this study supplies a roadmap for improving decentralization and efficiency. It also informs theoretically-grounded auction designs and behavioral models that could help mitigate some of the limitations of the current system. Thus, this work not only enriches understanding of decentralized systems but also aligns with broader objectives for secure and equitable blockchain infrastructures.